BMI View: The Spanish government's enthusiasm for a free-trade agreement with the Mercosur countries shows it is willing to put some sectors of agriculture at risk in exchange for access to new markets for the country's multinationals. Nevertheless, we believe that if such a deal were to go through - in the face of fierce opposition from some member states, France in particular - Spain's pork industry can expect to benefit. Spanish processed pork products have an excellent reputation and an eager market in South America. On the other hand, Spain's beef and poultry industries will likely find tough competition in equivalent South American products.

Key views

- Spain was largely spared the drought which laid waste to so many of Europe's grain crops in 2010. Barley production
for 2010/11 is forecast at 9.6mn tonnes, up 31.4% year-on-year (y-o-y). Wheat is forecast to rise 29.3% to 6.2mn tonnes.- In 2009, falling prices and reduced subsidies meant milk production declined by 1.5% y-o-y to 6.46mn tonnes. We expect the decline to have continued in 2010 and are forecasting a fall in production of 1.1% y-o-y to 6.38mn tonnes.- An exodus of young people from rural areas to the cities combined with rising costs has caused a decline in Spain's beef industry, a decline mirrored in many other EU states. In 2010 we expect beef production to have declined to 595,000 tonnes. By 2015, we are forecasting output of 558,000 tonnes, down 6.2%.- In 2009/10, sugar beet yields rose, causing production to increase for the first time in several years to 4.2mn tonnes. We nevertheless expect to see futher decline in the years ahead. In 2010/11, we forecast production to come in at 3.5mn tonnes, one of the lowest totals in decades, as the area dedicated to sugar continues to fall.

Industry Developments Unrest in the dairy industry goes on in Spain. On September 9, farmers' unions blockaded three factories belonging to dairy processors Lactalis, Lacteos Lence and Leite Celta, claiming the companies were refusing to pay fair prices for milk. They lifted the blockade after three days, but warned the campaign would continue. The incident shows that times remain tough for Spanish dairy farmers. We can expect more smaller producers to be forced out of the business in the months to come. We expect Spanish milk production to decline through to the end of our five-year forecast period in 2015.

The High-Level Group has released its seven recommendations for the EU dairy industry. They include implementing a futures market for dairy, increasing transparency in the dairy supply chain and improving the collective bargaining power of producers. BMI is watching developments closely. The proposals that are implemented and the timetable for their enactment may have profound effects on the Spanish dairy market. They remain a risk to our forecasts towards the end of our five-year outlook period.

The Spanish government is one of the strongest proponents of a free-trade agreement with Mercosur. Restarting talks with the South American bloc was one of the country's key objectives while it held the EU presidency in the first six months of 2010. The enthusiasm for the deal shows the government is willing to push aside farmers' concerns in exchange for enhanced access to Latin American markets for Spanish services and industrial firms.

Nevertheless, farmers' groups and some EU member states, led by the French, are likely to fight hard to protect domestic meat production. Pushing for a deal with Mercosur show Spain is willing to put some sectors of agriculture at risk in exchange for access to new markets for the country's multinationals. Nevertheless, we believe that if such a deal were to go through - in the face of fierce opposition from some member states, France in particular - Spain's pork industry can expect to benefit. Spanish processed pork products have an excellent reputation and an eager market in South America. On the other hand, Spain's beef and poultry industries will likely find tough competition in equivalent South American products.
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